Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 12, 2016

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 941 CHINA MOBILE ICBC TENCENT PETROCHINA CCB BANK OF CHINA HSBC PING AN SINOPEC CHINA LIFE Source: Bloomberg GF events Date Event Location 22 Aug Yuexiu Property luncheon Hong Kong 24 Aug Q Tech post result NDR Hong Kong Source: GF Securities (HK) A-Share Market Electronics: Watch investment opportunities arising from popularization of fast charging Fast charging is likely to be more commonly used in both smartphones and new energy vehicles as the industry chain becomes more mature. The development of fast charging technology will drive upgrades in relevant components as the different models of fast charging solutions require the use of their corresponding batteries, power management chips, chargers and charging ports. The popularization of new energy vehicles is also driving the development of electric vehicle fast charging technology, with Tesla and BYD the leading players. We are positive on companies with strengths in fast charging technology and products. New Energy Vehicles: July sales data review; sales volume to rise MoM over next five months According to the CPCA, a total of 29,500 units of new energy passenger vehicles were sold in China during July, surging 162% YoY but down 13% MoM. Based on historical monthly sales data (especially those for 2015), monthly sales volume tends to climb MoM during 2H following seasonal corrections around mid-year. We believe new energy PV output and sales are likely to post strength during the remainder of this year on the back of relevant policy issuances. We remain positive on the tri-element lithium battery industry. Land Market: Residential land transactions down MoM in July; key city markets remain strong The ratio of residential land supply to transactions edged down MoM in July. Residential land supply declined in both YoY and MoM terms in July, leading to MoM declines in both transaction volume and value. In addition, the transaction price premium over auction opening prices came down from June due to changes in the makeup of land parcels sold, but remained high compared with historical levels; in particular, land markets in key cities remained strong with transactions at a high price premium becoming increasingly common. Hong Kong Market Li Ning (2331 HK, Buy): Solid 1H16; room for higher GM; TP raised to HK$4.90 Li Ning saw a turnaround in 1H16 with net profit of Rmb113m (vs Rmb29m loss in 1H15). Revenue during the period grew 13% YoY. More impressively, the proportion of old products in its channel inventory continued to diminish. We expect Li Ning s mass-market-focused retail pricing strategy to help it gain market share from domestic peers, and still see room for GM expansion. We fine tune our FY16/17 core net profit forecasts by -2%/3% to factor in higher GM and staff expense assumptions, and raise our TP from HK$4.15 to HK$4.90. Alex Fan, CFA, Head of Research, SFC CE No. ADJ672 alexfan@gfgroup.com.hk Gao Yedong, Editor, SFC CE No. BAI002 yedonggao@gfgroup.com.hk

2 Electronics: Watch investment opportunities arising from popularization of fast charging Fast charging is likely to be more commonly used in both smartphones and new energy vehicles as the industry chain becomes more mature. Currently fast charging is mainly achieved through one of three models: high voltage steady current, low voltage high current, and high voltage high current. Mainstream smartphone fast charging products currently available in China include Qualcomm s Quick Charge series, MediaTek s Pump Express, and OPPO s VOOC flash charging system. Among these three market leaders, Qualcomm focuses on offering high voltage fast charging solutions, MediaTek is shifting its focus from high voltage to low voltage solutions, and OPPO focuses on low voltage solutions. Fast charging technology driving component upgrades The development of fast charging technology will drive upgrades in relevant components as the different models of fast charging solutions require the use of their corresponding batteries, power management chips, chargers and charging ports. Dialog, currently a supplier for both Qualcomm and MediaTek, is the leading manufacturer of power management chips and takes a majority share of the fast charging market. Tesla and BYD leaders of EV fast charging The popularization of new energy vehicles is also driving the development of electric vehicle fast charging technology, with Tesla and BYD ( CH) the leading players. Tesla s strategy focuses on developing supercharger stations, while BYD offers vertical charging towers. Silicon carbide is a key material used in fast charging inverters and adapters. Its production is currently dominated by non-chinese companies, meaning substantial room for import substitution going forward. Watch list Key component upgrades driven by the popularization of smartphone fast charging will give rise to new investment opportunities, while silicon carbide demand is likely to surge on the development of fast charging for new energy vehicles. We are positive on companies with strengths in fast charging technology and products, such as Jiawei Photovoltaic Lighting ( CH), Aihua Group ( CH), Sunwoda Electronic ( CH), Deren Electronic ( CH) and Luxshare Precision Industry ( CH). New Energy Vehicles: July sales data review; sales volume to rise MoM over next five months New energy PV sales continue to grow at healthy, high speed According to the CPCA, a total of 29,500 units of new energy passenger vehicles were sold in China during July, surging 162% YoY but down 13% MoM. Among the vehicles sold, 9,161 units were hybrids, which grew 51% YoY and remained flat MoM, while pure EVs rose 293% YoY but fell 18% MoM to 20,300 units. 7M16 new energy PV sales volume totaled 150,000 units (+140% YoY), comprising 100,000 units of pure EVs (+184% YoY) and 50,000 hybrids (+82% YoY). Sales volume to rise MoM over next five months The sales strength of grade-a vehicles in cities with car purchase restrictions and grade-a0/a00 vehicles in third/fourth-tier cities remained the key driver of new energy PV sales growth. We expect new energy PV sales volume to pick up further in MoM terms over the next five months following the seasonal MoM correction in July. Based on historical monthly sales data (especially those for 2015), monthly sales volume tends to climb MoM during 2H following seasonal corrections around mid-year. We believe new energy PV output and sales are likely to post strength during the remainder of this year on the back of relevant policy issuances. We remain positive on the tri-element lithium battery industry. We particularly like battery cell makers Aucksun ( CH), Guoxuan High-Tech ( CH) and Smarter Energy ( CH), and we suggest watching upstream cobalt producers such as Huayou Cobalt ( CH), China Molybdenum Luoyang ( CH) and China Nonferrous Metal ( CH); we also highlight Easpring Material Technology ( CH) and Cangzhou Mingzhu Plastic ( CH). Land Market: Residential land transactions down MoM in July; key city markets remain strong Overall transactions down, but key cities remain strong Residential land parcels with planned GFA of 58.15m sqm (-28% MoM, -18% YoY) were offered to market in 300 large cities during July, Page 2

3 with 54.05m sqm actually sold (-13% MoM, -5% YoY) for a total of Rmb187bn (-13% MoM, +51% YoY). This translates into an average price of Rmb3,460/sqm of planned GFA, representing a 61% premium over auction opening prices on average, which was 12pp lower than the premium in June but 37pp higher than one year ago. The ratio of land supply to transactions edged down MoM in July. Residential land supply declined in both YoY and MoM terms in July, leading to MoM declines in both transaction volume and value. In addition, the transaction price premium over auction opening prices came down from June due to changes in the makeup of land parcels sold, but remained high compared with historical levels; in particular, land markets in key cities remained strong with transactions at a high price premium becoming increasingly common. Land market performance by city First-tier Land parcels with planned GFA of 2.62m sqm (-9% MoM, -30% YoY) were brought to market in the four first-tier cities during July, with 3.52m sqm actually sold (+29% MoM, -10% YoY) for Rmb34.3bn (-26% MoM, -2% YoY). Residential land sales fell 50% MoM and 6% YoY to Rmb21.4bn, with transaction prices representing a 106% premium over auction opening prices. While transaction volume picked up significantly in MoM terms, land sales value dropped considerably due to changes in the mix of land parcels sold. That said, developers continue to see first-tier cities as the focus of land acquisition given the scarcity and high safety margin of land resources in these cities. Second-tier Land parcels offered to market in the 36 second-tier cities tracked had planned GFA of 55.48m sqm (-25% MoM, -2% YoY), while those actually sold had planned GFA of 49.16m sqm (-7% MoM, -9% YoY). Total land sales value amounted to Rmb130.6bn (-8% MoM, +56% YoY), with a premium of 50% over auction opening prices. Competition among developers for premium land parcels in these cities has remained intense in key second-tier cities (e.g. Wuhan, Hangzhou, Hefei) since mid Third/fourth-tier Land parcels with planned GFA of 85.64m sqm (-34% MoM, -29% YoY) were brought to market in the 262 third/fourth-tier cities we track during July, with 81.78m sqm actually sold (-14% MoM, -15% YoY) for a total of Rmb78bn (+8% MoM, +34% YoY), translating into an average price of Rmb954/sqm of planned GFA. Overall, land sales volume in third/fourth-tier cities declined in both YoY and MoM terms in July, while sales value picked up on higher average selling prices. However, overall land market conditions in these cities remain weak as key supply-demand indicators remain at low levels. Li Ning (2331 HK, Buy): Solid 1H16; room for higher GM; TP raised to HK$4.90 Maintain Buy and raise TP to HK$4.90 Li Ning saw a turnaround in 1H16 with net profit of Rmb113m (vs Rmb29m loss in 1H15). More impressively, the aging of its channel inventory continued to improve (proportion of products over 12 months old dropped from 28% in 1H15 to 25% in 1H16) and its low-teen sell-through growth was better than Anta s mid-to-high single-digit. We expect Li Ning s mass-market-focused retail pricing strategy to help it gain market share from domestic peers, and still see room for GM expansion. We fine tune our FY16/17 core net profit forecasts by -2%/3% to factor in higher GM and staff expense assumptions, and raise our TP from HK$4.15 to HK$4.90, based on 17x FY17E P/E, after rolling forward our valuation basis. Room for GM improvement We believe the improvement could come from the following: 1) Given the proportion of products over 12 months old in its channel inventory dropped YoY in 1H16, new product sales mix could improve further from 76% in 1H16, boosting GM. Management sees 85% as an optimal new product mix level, which suggests a further ~2pp GM expansion for its retail business. 2) Profitability improvement at distributors from positive SSSG and better new product mix could help the company to reduce its support for distributors and enhance GM in its wholesale business. We estimate Li Ning s wholesale GM is below Anta s. However, theoretically Li Ning s wholesale GM can be higher than Anta s given its wholesale discount (~45% of tag price) is less than Anta s (39-41% of tag price). 3) Further consolidation of its supply chain. 4) Better channel revenue mix as GM in its rapidly-growing e-commerce business (GM >50%) is higher than that for the group overall. FY16 guidance (1) Low-teen to mid-teen revenue growth led by mid single-digit SSSG; 2) GM expansion of pp; 3) low single-digit YoY growth in operating expenses in 2H16; 4) ~200pp YoY reduction in operating expenses ratio; 5) core net profit margin of 3%+ (vs 0.2% in FY15); 6) although the number of net store additions was just 36 in 1H16, the company has still maintained Page 3

4 its target of net store additions for FY16. The proportion of new directlyoperated/franchised stores is expected to be 50%/50%. 1Q17 trade fair results 1Q17 order book growth was maintained at a high single-digit, the same as in 4Q16. Management targets high single-digit order book growth in FY17. Results highlights 1H16 revenue grew 13% YoY. Li Ning brand revenue was up 14% YoY led by 108% growth of e-commerce sales. SSSG improved from a low single-digit in 1Q16 to a high singledigit in 2Q16. Total retail sell-through saw low-teen growth, better than Anta s mid to high singledigit growth. GM increased 1.5pp to 46.7%. Excluding the 1pp reduction due to a change in inventory provision, GM would have widened by 2.5pp given the 0.8pp from higher direct retail new product mix, 0.7pp from an improved supply chain, 0.6pp from a higher wholesale new product mix and 0.4pp from channel revenue mix. Excluding the change in provisions, operating expenses rose 8% YoY, equivalent to a 2.2pp decrease in operating expenses ratio. The company recorded a net profit of Rmb113m (vs Rmb-29m in 1H15), representing a net profit margin of 3.2%, in line with its guidance of 3%+. Operating cash flow rose 110% to Rmb346m, led by a 15-day reduction in its cash conversion cycle. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Page 4

5 Rating Definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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